Chapter 3: American Free Enterprise

Section 1

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Objectives

1. Define the basic principles of the U.S.

free enterprise system.

2. Describe the role of the consumer in the

American economy.

3. Identify the constitutional protections

that underlie free enterprise.

4. Explain why the government may

intervene in the marketplace.

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Key Terms

• profit motive: the incentive that drives

individuals and business owners

• open opportunity: the principle that

anyone can compete in the marketplace

• legal equality: the principle that everyone

has the same legal rights

• private property rights: the principle that

people have the right to control their

possessions and use them as they wish

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Key Terms, cont.

• free contract: the principle that people may decide what agreements they want to enter into

• voluntary exchange: the principle that people may decide what, when, and how they want to buy and sell

• interest group: a private organization that tries to persuade public officials to act in ways that benefit its members

• patriotism: love of one’s country

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Key Terms, cont.

• eminent domain: the right of a government to take private property for public use

• public interest: the concerns of society as a whole

• public discourse laws: laws requiring companies to provide information about their products or services

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Introduction

• What are the benefits of free enterprise?

– Free enterprise makes it possible for people

who have ideas and persistence to start

businesses and make themselves successful.

– Free enterprise also offers a great deal of

economic freedom to the consumer.

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What is Free Enterprise?

• The United States is considered by many to be a

“land of opportunity.”

• The American tradition

of free enterprise has

been a key factor in

supporting this belief.

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Principles of Free Enterprise

• Characteristics of a free enterprise include:

– Profit motive

• The American economy rests on recognition of

the profit motive as a key incentive. In a free

enterprise businesspeople make decisions

based on what will increase their profits.

– Open opportunity

• The American principle of open opportunity

says that anyone can compete in the

marketplace.

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Principles, cont.

• Checkpoint: What are three key economic rights

that Americans enjoy?

– Legal equity

• American free enterprise believes in the principle that

everyone has the same legal rights.

– Private property

• The free enterprise system allows people to make their

own decisions about their own property.

– Freedom to buy and sell

• People can decide what agreements to enter into, as

well as what, when, and how they want to buy and sell.

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The Role of the Consumer

• Checkpoint: What role do consumers play in a

free enterprise system?

– In the free enterprise system consumers have the

freedom to make their own economic choices.

Through voluntary exchange, consumers send a

signal to businesses, telling them what to produce

and how much to make.

– Consumers can also make their wishes known to

businesses by joining interest groups, which influence

public officials to act in ways that benefit its members.

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The Constitution

• Free enterprise in the United States is written into the framework of the U.S. Constitution.

– One right granted by the Constitution is the 5th Amendment, which protects private property from being taken from a citizen without due process.

– However, the government is allowed to take property from an individual, paying fair market value for that property, when there is a public reason. This is known as eminent domain.

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The Constitution, cont.

• The Constitution also spells out how government can tax individuals and businesses.

– According to Article 1, Congress could levy taxes but not until the passage of the Sixteenth Amendment in 1913 Congress could levy an income tax on individuals and businesses.

• Finally, the Constitution guarantees people and businesses the right to make contracts.

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The Role of Government

• The government plays many roles in the

marketplace.

• These roles include:

– Carrying out the constitutional responsibilities

to protect property rights, contracts, and other

business activities

– Making sure that producers provide

consumers with information

– Protecting the health, safety, and well-being

of consumers.

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Major Federal Regulatory Agencies

• All of the agencies to the right represent ways the federal government intervenes in the marketplace.

– Identify one agency

meant to protect each of the following: (a) public safety, (b) fair competition, (c) equality.

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Negative Effects of Regulation

• Negative effects of

government include:

– Rules are costly to

implement

– Regulations stifle

competition

– Increased government

spending in industries

because the government

has to hire workers to do

the actual oversight

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Review

• Now that you have learned about the

benefits of free enterprise, go back and

answer the Chapter Essential Question.

– What role should government play in a free

market economy?